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Currencies CHF Euro Traders Prepare for Direct Stimulus Update

Talking Points:

  • Dollar and S&P 500 Suffer Worst Declines Since October Panic
  • Euro Traders Prepare for Direct Stimulus Update
  • Swiss Franc Potential Lopsided in SNB Rate Decision

Dollar and S&P 500 Suffer Worst Declines Since October Panic
‘The Dollar’s safe haven status is broken’? That seems to be a claim be made more often these days and is reinforced by this past session where the currency suffered its worst single-session loss since mid-October…a similar record to the S&P 500’s 1.6 percent slump. Both Dollar and equities have advanced in tandem over the past weeks, and are now correcting together. Yet, this likely due to a strong drive in sentiment and is more likely a result of too staid a speculative backdrop. Looking out across the various asset classes that have strong to moderate connections to the mass ebb and flow in investor sentiment, we find that their trajectories are varied and pacing inconsistent. If we were experiencing a full-scale ‘risk aversion’ theme, we would expect all assets even close to a ‘rich’ valuation or exposed should capital flight kick in would be in retreat. We may yet get there with the proper coaxing, but it is an uphill battle as liquidity thins out heading into the yearend or at the very least before next week’s heavy-hitting event risk (like the FOMC rate decision). Before we hit a sentiment extreme and liquidity is the only thing investors prize, there is the natural pull in December seasonality where investors are looking to book (or ease up) on their successful trades – whether stocks or Dollar pairs. In the absence of a more provocative catalyst, this rebalancing can continue.

Euro Traders Prepare for Direct Stimulus Update
There are a number of concerns hanging over the Euro’s head, but speculation over and action from ECB policy easing has been the main rudder of the EURUSD’s 7-month, 1,400-pip tumble. Last week, the central bank struck a balanced tone at its policy meeting and confirmed to the market that hopes for a US or Japan-style quantitative easing for the Eurozone would not come at least until the first quarter of next year. Further, this past session, a supposed leaked draft for next week’s EU Summit suggested the region’s politicians are pushing back debate on a more uniform economic policy across its members that would lead to long-term improvement rather than the short-term salve of monetary policy. This eases back on this strong current, but the overriding objective to increase the balance sheet by €1 trillion burns in the market’s mind. That – and our proximity to critical, decade-long support for EURUSD – will keep the market focused on the update from one of the ECB’s holdover programs. The second allotment of the Targeted-LTRO program will be reported at 10:10 GMT. The first injection fell well short of the market’s expectations, but the currency offered limited immediate response. This time, with a dovish bias, a strong uptake may be seen as the market’s ‘need’ for support. A weak one conversely may be taken as a sign of the existing programs’ ineffectiveness. Another update worth watching is Ireland’s 3Q GDP. Given the growing turmoil in Greece, ‘periphery’ trouble can add another layer of complexity for the Euro.

Swiss Franc Potential Lopsided in SNB Rate Decision
Officials at the Swiss National Bank likely breathed a sigh of relief after the Gold Referendum was voted down and the group could maintain its primary policy of keeping the 1.2000-floor under EURCHF. However, that relief does little to change the market motivations to keep the pair anchored to the artificially-imposed level. The ECB’s stimulus ambitious are immense and keep the Euro under pressure. Holding the line can prove expensive for the SNB, but they would likely be successful. It would just be a long wait for the payoff. Alternatively, a new policy move – such as negative rates on foreign capital – could curb the capital flows that are truly causing the central bank so much trouble. Given their status quo approach, this is a low probability. That said, the impact should they upgrade could be huge. And, all of this against 35 pips of risk.

New Zealand Dollar Surges After RBNZ Revives Rate Hike Talk
With a broken record mantra that the New Zealand is unreasonably high, the market expected the RBNZ to maintain its ineffective worry over the exchange rate and avoid any speculation as to when the next policy shift would occur. That is why so many were caught off-guard when Governor Graeme Wheeler remarked that he expects a more gradual rise in rates and growth was stronger than expected. The central banker said he was surprised that his comments set off a rally, but talking about hikes when others (ECB, BoJ) are employing QE will do that.

Oil’s Break Ends, Extends Tumble to Fresh Five-Year Low
A day’s break from a heavy bear trend had many speculative traders trying to call a bottom on US Oil…again. Yet, this effort to catch another falling knife ended much like the previous efforts – with cuts. The WTI-grade benchmark futures contract dropped below $62-per-barrel for the first time since July 2009 after the OPEC forecast demand for the commodity would drop to 28.92 million barrels per day in 2015 – the lowest in over a decade. The supply-and-demand considerations are just as prolific as speculative pain at this point.

Emerging Market: Bank of Korea Keeps up Currency War Concern, Russia Rate Decision Ahead
The MSCI Emerging Market ETF gapped to an 8-month low Wednesday and the FX ranks fared little better. Thursday carries with it unusually heavy event risk from the EM world. The Bank of Korea announced earlier a hold on its benchmark lending rate but made sure to reiterate its concerns over the influence of the BoJ’s aggressive easing policy on its own economic health. Currency war concerns are growing once again. Ahead, Russia’s Central Bank will try again to stem the Ruble’s tumble with an expected 100 bp rate hike to 10.50 percent.

Gold’s Run Stalls Despite Dollar Troubles
A 2.3 percent rally from gold Tuesday projected the most optimism amongst bulls in some time. Yet, its ambitions don’t seem to be too firmly set. The commodity stalled this past session even though the Greenback tumbles. Perhaps monetary policy efforts by the ECB, SNB and Emerging Market central banks will offer the metal some alternative-to-traditional-currency appeal.

ECONOMIC DATA
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 SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE121214b

INTRA-DAY PROBABILITY BANDS 18:00 GMT121214c

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